Gratuity Complete Guide: Rules, Calculation & Tax for 2026

Gratuity is a retirement benefit paid by employers to employees as a token of gratitude for years of service. Under the Payment of Gratuity Act, 1972, it's a legal right—not a bonus or favour.

Here's everything you need to know about gratuity in 2026, including the new Labour Code changes.

Gratuity at a Glance

Aspect	Details
Eligibility	5 years of continuous service (1 year for fixed-term contracts)
Formula	(15 × Last Drawn Salary × Years of Service) ÷ 26
Maximum Limit	₹20 lakh (₹25 lakh for central govt employees)
Tax Exemption	Up to ₹20 lakh for private sector
Payment Deadline	Within 30 days of becoming due

Calculate your gratuity: Use our Gratuity Calculator for instant results.

Who is Eligible for Gratuity?

The 5-Year Rule

You must complete 5 years of continuous service with the same employer to qualify for gratuity. This is the most important eligibility criterion.

Service Duration	Gratuity Eligibility
Less than 5 years	Not eligible (exceptions below)
5 years or more	Fully eligible
4 years 8 months	Eligible (rounds to 5 years)
4 years 6 months	Not eligible (rounds to 4 years)

Important: Service of 6 months or more in the last year is rounded up to the next full year.

Exceptions to the 5-Year Rule

Exception	Gratuity Eligibility
Death of employee	Eligible regardless of service period
Disability (accident/disease)	Eligible regardless of service period
Fixed-term contracts (new rule)	Eligible after 1 year

Organization Coverage

Criteria	Coverage
10+ employees on any day in last 12 months	Must pay gratuity
"Once covered, always covered"	Even if headcount drops below 10
All industries	Factories, mines, plantations, ports, shops, establishments

How to Calculate Gratuity

Standard Formula (Gratuity Act Covered)

Gratuity = (15 × Last Drawn Salary × Years of Service) ÷ 26

Where:

• Last Drawn Salary = Basic Pay + Dearness Allowance (DA)
• Years of Service = Completed years (rounded as per rules)
• 15 = 15 days' salary for each year of service
• 26 = Working days in a month (excluding Sundays)

Example Calculation

Detail	Value
Basic Salary	₹50,000
Dearness Allowance	₹10,000
Last Drawn Salary	₹60,000
Years of Service	8 years 7 months → 9 years

Gratuity = (15 × 60,000 × 9) ÷ 26 = ₹3,11,538

For Non-Act Covered Employers

Some employers not covered under the Gratuity Act use a different formula:

Gratuity = (15 × Last Drawn Salary × Years of Service) ÷ 30

Formula	26-day divisor	30-day divisor
Same salary & years	Higher amount	Lower amount
Difference	~15% more	~15% less

New Labour Code Changes (2026)

The Social Security Code 2020, effective from November 2025, brings significant changes:

1. Wage Definition Change

Old Rule	New Rule
Basic + DA only	"Wages" must be at least 50% of CTC
Companies could minimize gratuity	Higher gratuity amounts now

Impact: If your CTC is ₹12 lakh but Basic + DA is only ₹4 lakh, the new code may require higher gratuity calculation.

2. Fixed-Term Employees

Old Rule	New Rule
5 years needed	1 year for fixed-term/contract employees
Many contract workers excluded	More workers now eligible

3. Universal Social Security

Change	Impact
Coverage expansion	More establishments covered
Gig workers	May be eligible under new provisions

Gratuity Tax Rules

Tax Exemption Limits

Employee Type	Exemption Limit
Government employees	Fully exempt (no limit)
Private sector (Act covered)	Least of: ₹20 lakh / Actual amount / Formula amount
Private sector (Non-Act)	Same as Act-covered

How Tax Exemption Works

For private sector employees, the exempt amount is the least of these three:

Calculation	Amount
1. Statutory limit	₹20 lakh
2. Actual gratuity received	As per employer calculation
3. Formula amount	(15 × Avg salary of last 10 months × Years) ÷ 26

Tax Example

Detail	Amount
Gratuity received	₹22 lakh
Statutory limit	₹20 lakh
Formula amount	₹19 lakh
Exempt amount	₹19 lakh (least)
Taxable amount	₹3 lakh

Maximum Gratuity Limits

Category	Maximum Limit
Central govt employees	₹25 lakh
State govt employees	Varies by state
Private sector (Act covered)	₹20 lakh
Private sector (Non-Act)	No statutory cap (employer policy)

What If Calculation Exceeds Limit?

Scenario	Outcome
Formula gives ₹25 lakh	Capped at ₹20 lakh (private)
Employer pays more voluntarily	Excess is taxable

What Happens If You Leave Before 5 Years?

No Gratuity Scenarios

Situation	Gratuity
Resignation before 5 years	Not eligible
Termination before 5 years	Not eligible (unless death/disability)
Fired for misconduct	Can be forfeited (even after 5 years)

Forfeiture Conditions

Gratuity can be fully or partially forfeited if termination is due to:

Cause	Forfeiture
Moral turpitude	Full forfeiture possible
Riotous/disorderly conduct	Full forfeiture possible
Willful damage to employer property	To extent of damage caused

Gratuity Payment Timeline

Event	Deadline
Employee applies for gratuity	Within 30 days of becoming due
Employer determines amount	Within 30 days of application
Employer pays gratuity	Within 30 days of determination
Total maximum time	30 days from due date

What If Employer Delays?

Delay	Consequence
Beyond 30 days	Interest @ 10% per annum
Refusal to pay	Employee can file complaint with Controlling Authority

Gratuity vs Other Retirement Benefits

Benefit	Gratuity	EPF	PPF
Eligibility	5 years service	All salaried employees	All Indian residents
Employer contribution	Yes (100%)	Yes (12%)	No
Employee contribution	No	Yes (12%)	Yes
Tax on receipt	Exempt up to ₹20L	Tax-free (conditions)	Tax-free

How to Claim Gratuity

Documents Required

Document	Purpose
Form I (Application)	Claim application
Proof of service	Appointment letter, relieving letter
Identity proof	Aadhaar, PAN
Salary slips	Last drawn salary proof
Bank details	For payment transfer

Claim Process

Step	Action
1	Submit Form I to employer within 30 days of leaving
2	Employer calculates and verifies
3	Employer issues Form L (Notice of payment)
4	Payment credited to bank account

If Employer Doesn't Pay

Step	Action
1	Send written reminder
2	File complaint with Controlling Authority (Labour Commissioner)
3	Controlling Authority summons employer
4	Order for payment with interest

Gratuity in Different Scenarios

Scenario 1: Job Change After 6 Years

Detail	Value
Last drawn salary	₹80,000
Service	6 years 4 months → 6 years
Gratuity	(15 × 80,000 × 6) ÷ 26 = ₹2,76,923

Scenario 2: Retirement After 25 Years

Detail	Value
Last drawn salary	₹1,50,000
Service	25 years
Formula gratuity	(15 × 1,50,000 × 25) ÷ 26 = ₹21,63,462
Actual received	₹20,00,000 (capped)

Scenario 3: Death During Service (3 Years)

Detail	Value
Last drawn salary	₹40,000
Service	3 years (5-year rule waived)
Gratuity to nominee	(15 × 40,000 × 3) ÷ 26 = ₹69,231

Common Mistakes to Avoid

1. Not Counting Service Correctly

Mistake	Correct Approach
Counting only full years	Include service ≥6 months as full year
Ignoring notice period	Notice period counts as service

2. Wrong Salary Base

Mistake	Correct Approach
Using gross salary	Use Basic + DA only
Including HRA, bonus	These are excluded

3. Not Claiming Within Time

Mistake	Consequence
Not applying within 30 days	May delay payment
Assuming employer will auto-pay	May need to follow up

Gratuity Calculator Example

Use our Gratuity Calculator to calculate your exact gratuity amount.

Input	Your Scenario
Monthly Basic + DA	Enter your amount
Years of Service	Enter completed years and months
Employee Type	Government/Private

The calculator shows:

• Eligible gratuity amount
• Tax-exempt portion
• Taxable portion (if applicable)

Key Takeaways

Point	Details
5 years minimum	Required for eligibility (1 year for fixed-term)
Formula	(15 × Salary × Years) ÷ 26
Maximum	₹20 lakh (private), ₹25 lakh (govt)
Tax-free	Up to ₹20 lakh for private employees
New rules	Labour Code 2026 expands coverage
Deadline	Employer must pay within 30 days

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Calculate your gratuity: Use our Gratuity Calculator to find out exactly how much you're entitled to receive.